Oil Traders Attempt To Claw Back Losses

U.S. West Texas Intermediate crude oil futures edged higher on Thursday in a mostly uneventful trade, highlighted by a benign government weekly inventories report.

Traders were trying to claw back losses from the biggest two-day setback for the start of a year in three decades. Helping to underpin the market was a shutdown of a U.S. fuel pipeline while economic concerns are capping gains. But fear of a global recession and lower demand capped gains.

Steep Plunge to Start New Year

WTI’s cumulative decline of more than 9% on Tuesday and Wednesday were the biggest two-day losses at the start of a year since 1991, according to Refinitiv Eikon data. Reflecting near-term bearishness, the nearby contracts of the U.S. benchmark traded at a discount to the next month, a situation known as contango.

Cluster of Bearish Factors Weighing on Prices

A number of factors are contributing to the weakness at the start of the new year.

The World Health Organization said data from China showed that while no new coronavirus variant has been found there, the country has under-represented how many people have died in its recent, rapidly spreading outbreak. This could show up in bearish domestic demand numbers.

In the U.S., demand concerns were also raised after a report showed U.S. manufacturing contracted further in December, dropping for a second straight month to 48.4 from 49.0 in November. According to the Institute for Supply Management (ISM), this was the weakest reading since May 2020.

Finally, the Federal Reserve released the minutes of its December monetary policy meeting on Wednesday, reinforcing expectations the central bank is likely to continue raising interest rates.

Higher rates could lift the U.S. Dollar, making commodities priced in the U.S. currency more expensive for foreign buyers of crude oil. This could also weigh on demand.

Additional Pressure from American Petroleum Institute Build

Crude oil inventories rose by 3.298 million barrels, American Petroleum Institute (API) data showed Wednesday, after a million bpd in U.S. refining capacity was taken offline last week.

The build in commercial crude oil inventories comes as the Department of Energy released 2.7 million barrels from the Strategic Petroleum Reserves in the week ending December 30, leaving the SPR with just 372.4 million barrels.

Gasoline stocks also rose.

Weekly Technical Analysis

Weekly February WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. A move through $91.19 will change the main trend to up. A trade through $60.05 will reaffirm the downtrend.

The minor trend is also down. A trade through $83.27 will change the minor trend to up. This will also shift momentum to the upside.  

Retracement Level Analysis

The contract range is $36.16 to $106.51. Its retracement zone at $71.34 to $63.03 is the next major downside target and value zone.

The short-term range is $91.19 to $70.31. Its retracement zone at $80.75 to $83.21 is resistance.  This zone helped stop the rally at $81.50 earlier this week.

The minor range is $70.31 to $81.50. The market is currently trading on the weak side of its pivot at $76.79, making it resistance.

Weekly Technical Forecast

The direction of the February WTI crude oil market for the week ending January 13 is likely to be determined by trader reaction to the minor pivot at $76.79.

Bullish Scenario

A sustained move over $76.79 will signal the presence of buyers.  If this move creates enough upside momentum then look for a surge into the short-term retracement zone at $80.75 to $83.21.

Overtaking $83.27 will shift momentum to the upside and could trigger an acceleration to the upside with $91.19 the next major target price.

Bearish Scenario

A sustained move under $76.79 will indicate the presence of sellers. If this move creates enough downside momentum then look for the selling to possibly extend into the support cluster at $71.34 to $70.31.

A failure to hold $70.31 could trigger an acceleration to the downside with $63.03 the next major target price.  

Short-Term Outlook

Helping drive Friday’s gains was a statement from top U.S. pipeline operator Colonial Pipeline, which said late on Wednesday its Line 3 had been shut for unscheduled maintenance with a restart expected on Jan. 7.

Despite today’s short-covering rally, the pipeline shutdown is not major enough to change the trend, leaving the bear market intact.

Traders are paying closer attention to lower U.S. fuel inventories that could provide some support and worries about a global recession following weak short-term economic signs in the world’s two biggest oil consumers, the United States and China.

Traders will be watching Friday’s U.S. Non-Farm Payrolls report closely also since it could dictate Fed policy. So far, the data this week points toward a strong U.S. labor market, which supports the Fed’s desire to raise rates throughout 2023. Higher interest rates could push the U.S. economy into recession, which would have a major impact on gasoline demand and consequently crude oil inventories.

Technically, we’re expecting more sideways price action as long as the market remains inside $83.27 and $70.31.